The fracture in the Reserve Bank Board between the Governor and the Treasury Secretary on the stance of monetary policy has its origins in the Treasurer’s failure to recognise the dangers of an unsustainable housing sector.

Both the Treasury and the RBA are obviously concerned with the resilience of the Australian economy. However it appears that the RBA feels that it is constrained in adjusting interest rates because of the overheated property market.

The RBA Board is now in a difficult bind.

Leaving interest rates unchanged runs the risk of not helping the Australian economy at a time when it is facing serious challenges, and cutting interest rates runs the risk of further inflaming an already overheated property market.

The RBA has repeatedly warned of the dangers of a booming property market and its counterpart, escalating household debt. I have supported such warnings and have put forward proposals to address this problem. In an October 2002 speech to the Housing Industry Association I called for the Treasurer to gather together representatives from financial institutions, regulatory authorities and industry bodies involved with home lending. As a second step I suggested reviewing existing guidelines for real estate lending practices and possibly utilising the US model for lending guidelines.

The Treasurer has never taken the problem of household debt and the inflated property market seriously.

The stark terms of the Reserve Bank’s warning today makes clear the price ordinary Australians are likely to pay for Mr Costello’s arrogant complacency and inactivity.